[2024] UKUT 00152 (TCC)

HMRC submitted that there were two specific errors of law in the FTT’s findings concerning SICL’s purpose.

The first error that HMRC assert was in relation to the proper analysis of Article 12(5) of the treaty and the extent to which SICL needed to have specifically identified Article 12(1) as the provision which it was seeking to take advantage of.

We accepted as part of our consideration of Ground 1 that, as a matter of the proper interpretation of Article 12(5) of the UK-Ireland treaty, there was no need for SICL to have been specifically aware of the relevant provision of the treaty. We do not consider, however, that this error of law on the part of the FTT affected its evaluative judgment to a material extent. Once they made their finding as to the law at [150], the FTT did not subsequently refer to the issue of specific identification at any stage of their detailed evaluation of SICL’s subjective purpose. That was because the FTT found that, as at the date the commercial deal was agreed (8 February 2018), SICL did not know anything about the identity of the purchaser. As such, it was not then relevant for the FTT to go further and consider the extent of SICL’s knowledge of the provisions of a treaty of which SICL was, so the FTT had found, unaware as at that date.

The second error, HMRC argued, was that, if specific identification of the treaty was required, the FTT had in fact correctly held that SICL had the requisite knowledge as at the Trade Date (12 February 2018). As part of this submission, HMRC also criticised the FTT for failing to have proper regard to events taking place after 8 February 2018 in determining the purpose SICL had when entering into the Assignment at the later date of 12 February 2018.

HMRC accept that SICL’s subjective intentions did not change from 8 February 2018 until the Trade Date. They nonetheless argue that, despite SICL’s finding out wholly for non-tax reasons (see [165(5)]) the identity of the purchaser and hence being able to infer the basis on which UK WHT was not an issue for BLM, the knowledge of SICL as at the Trade Date was decisive. That submission was advanced primarily on their interpretation of Article 12(5) of the UK-Ireland treaty, which we have rejected.

However, HMRC also submitted that, even if SICL’s conscious purposes did not change when it found out on the Trade Date that BLM was benefiting from Article 12(1) of the UK-Ireland treaty, its subconscious purposes did. We reject that submission. It represents, in our view, a disagreement with the FTT’s factual evaluation.

HMRC were free to submit to the FTT that SICL’s subjective purpose was altered when it found out that BLM was a resident in Ireland (following enquiries that SICL made for non-tax reasons). It was free to submit that this gave SICL a “subconscious motive” for being party to the Assignment by analogy with the cases of Vodafone Cellular Ltd and others v Shaw (Inspector of Taxes) [1997] STC 734, Mallalieu v Drummond (Inspector of Taxes) [1983] STC 665 and MacKinlay (Inspector of Taxes) v Arthur Young McClelland Moores & Co [1989] STC 898. However, the FTT was not bound to accept those submissions or find that there were two separate purposes, a conscious one and a subconscious one. The FTT had found that SICL did not care about (or even know about) Article 12(1) on 8 February 2018 and it did not care about it on 12 February 2018 either (when it did acquire the knowledge). The FTT was, in our view, entitled to conclude that SICL’s object or purpose in entering into the Assignment did not change from 8 February to 12 February 2018.

In addition, HMRC had four other criticisms of the way in which the FTT assessed SICL’s purpose in entering into the Assignment.

First, HMRC criticised the FTT’s analysis that SICL had the “sole purpose” of realising the SAAD Claim for the “best possible price” so as to realise a profit. The profit was, in HMRC’s view, solely attributable to the UK WHT arbitrage and both BLM and SICL knew that as at the Trade Date. We have considered this point in our rejection of Ground 2 of the appeal and have explained why, in the case of a treaty between the UK and Ireland which allocated sole taxing rights to Ireland in respect of interest beneficially owned by one of its residents, we consider HMRC’s focus on UK WHT to be misplaced.

Second, HMRC say that the FTT was wrong at [193(3)] to be concerned with the fact that the application of Article 12(5) would turn on whether the seller happens to be aware of the identity and tax residence of the purchaser. HMRC say that there is nothing unusual in an anti-avoidance provision turning on the knowledge of the parties to the transaction. We do not doubt that. But that was not the point that the FTT was making. At [193] the FTT was considering circumstances where a seller wanted to assign a debt for the highest price in circumstances where a market existed in which UK WHT would not represent a cost for those purchasers for a variety of reasons. In those circumstances, the FTT struggled to see why it would then be an abuse of the UK-Ireland treaty if the seller “happens to be aware” of the identity and tax residence of the purchaser, particularly as the interest would be taxable (but in Ireland rather than the UK). The FTT was entitled to reflect on these matters when reaching its multi-factorial evaluation. We do not consider that in so doing it employed flawed reasoning entitling us to interfere with the Decision.

Third, HMRC objected to what the FTT said at [195] about the impact of HMRC’s case on the secondary debt market, noting that there was no evidence to support that finding and there could be no possible objection to two contracting States reaching an agreement designed to deal with WHT arbitrage (whether UK WHT or Irish WHT).

We do not regard what the FTT said at [195] as making a factual finding about how the “secondary debt market” operates. The FTT was merely commenting on potential anomalies that might arise if HMRC’s analysis was correct. The FTT was, in our view, expressing a view that Article 12(5) does not apply in a case like the one before us. It was, in truth, just a different way of making the point it had already made at [193]. Again, we do not think that this can be regarded as a flaw in the FTT’s reasoning. Even if it could be so regarded, it was not, in our view, material to the conclusion reached by the FTT.

The fourth objection by HMRC was that there was no basis in the wording or purpose of Article 12(5) for regarding it as “aimed at” transactions involving conduits or treaty shopping ([197]) and that “something more” than the facts of the present case was required ([201]). HMRC also objected to the suggestion, at [200], that the “something more” might consist of circumstances where SICL had retained an economic interest in the interest and had indirectly accessed Article 12(1) through BLM, contending that this was inconsistent with the FTT’s earlier conclusion that there was no need for artificial steps or arrangements to exist before Article 12(5) was engaged.

We have dealt with these points in our discussion of Ground 1. As we explain above, it is clear from the OECD material that Article 12(5) was intended to catch transactions of the kind the FTT referred. Transactions involving conduit companies were a paradigm example and were mentioned specifically in OECD material. However, at [201], the FTT reiterated its earlier conclusion that Article 12(5) was not limited to artificial arrangements. It was not, therefore, saying that only “conduit arrangements” would be capable of engaging Article 12(5). Read as a whole, at [197] to [200], the FTT was reprising conclusions it had expressed earlier in the Decision and explaining why it did not consider the Assignment to be analogous to the arrangements described in the Conduit Report. We do not consider that discussion to involve any error of law.

Accordingly, we dismiss Ground 4 of HMRC’s appeal.